We have already explained what Bitcoin and Ethereum are and how they work in previous articles so if you haven’t read those yet I suggest you do so before reading this blog. If you have read them or you already know a bit about each cryptocurrency, let’s get right into it.
While Bitcoin and Ethereum share many similar traits in their respective cryptographic and distributed ledgers, they also differ in fundamental ways.
Ethereum vs. Bitcoin: the Key Differences
Bitcoin was built to be a decentralised digital currency. Therefore, its features are built around its ability to be electronic cash that cannot be double spent and which has a limited supply. The creators of Ethereum place more value on other features, like the Ethereum network’s ability to host DApps (Distributed Applications).
Another key distinction between the two coins is that there is no hard limit that restricts the supply of Ether only soft controls that make Ether harder to mine as time goes on.
The main reason for these variances is the fact that each coin is meant be used in different ways. The tighter controls on the supply of BTC make it scarcer and thus more valuable.
Like Bitcoin, Ether the token that powers the Ethereum network is also a tradable asset. However, Ethereum is meant to be used primarily as a decentralized “world computer.” That’s why it has more features and less monetary supply controls compared to Bitcoin.
Different Methods for Maintaining Network Integrity
Double spending occurs when a hacker is able to compromise a cryptocurrency network in a way that allows them to spend the same quantity of digital money twice.
Bitcoin guards against the threat of double spending by using miners to verify transactions. These miners check transactions before they get written to Bitcoin’s blockchain and ensure that they are valid. Ethereum also writes all transactions to a public blockchain, but it uses a faster confirmation technique to prevent hackers from spending ETH that they don’t actually have.
So far, both anti-double spending techniques have good track records. No one has ever managed to successfully double-spend their funds on either cryptocurrency network.
Bitcoin’s anti-double spending mechanism
After sending a transaction from a Bitcoin wallet, it lands in a pool of unconfirmed transactions called the mempool. From there, Bitcoin miners begin to analyze the transaction. If the transaction checks out, the transaction gets added to the blockchain. Likewise, when a transaction is rejected, it’s as if it never occurred in the first place.
Ethereum’s anti-double spending mechanism
Each Ether wallet is tagged with a nonce a number that indicates the number of transactions that have been sent. The network uses this number to identify and reject double spend attempts. This verification technique is faster compared to the technique Bitcoin uses.
Countering inflation: a Tale of Two Supply Control Philosophies
Bitcoin generally holds at least 50% of the total cryptocurrency market cap as it is the first cryptocurrency and still the most popular due to its ease of use and goal of becoming a global currency.
One reason that Bitcoin continues to attract attention from investors is that it was specifically designed to retain its value over time.
The creators of Bitcoin placed a 21 million BTC cap on its supply. This limit was created to prevent Bitcoin from losing value due to inflation.
It’s easy to see why Bitcoin’s anonymous creators were concerned about inflation. Over the course of history, many governments (Germany’s Weimar Republic is perhaps the most famous example) have tried to deal with their financial problems by simply printing more money.
While adding to the money supply sometimes has a positive short term effect on economic growth, it’s usually only a matter of time before the price of the inflated currency begins to decline. At the height of the inflation crisis in WWI-era Germany, one US dollar was worth 4,210,500,000,000 German marks.
“A fixed money supply, or a supply altered only in accord with objective and calculable criteria, is a necessary condition to a meaningful just price of money.”
— Economist Bernard W. Dempsey
Unlike Bitcoin, Ethereum doesn’t use hard limits to guard against inflation. In fact, Ethereum developers are free to tighten or loosen the cryptocurrency’s monetary policy at any time-- provided they can get their proposal pushed through Ethereum’s governance system. In April of 2018, Ethereum creator Vitalik Buterin tried and failed to get the Ethereum developers to agree to a hard limit on the supply of Ether amid inflation concerns.
Ethereum Use Cases
Ethereum is not just the cryptocurrency network that processes Ether transactions it’s also the largest and most well-established, open-ended decentralized software platform in the world. Smart contract functionality and built-in support for DApps are some of the coin’s main attractions. Though it is possible to build software on top of Bitcoin, it’s mainly used as a means of payment and as an investment asset.
Here is a quick look at some of Ethereum’s core features.
Smart contracts give you the ability to exchange property, money, shares and many other assets-- all without the need to go through a middleman. All the variables of the contract get recorded to Ethereum’s publicly accessible blockchain. Because the contract executes autonomously, using a smart contract is similar to buying a can of soda from a vending machine. The entire process happens automatically, without the need for human intervention or oversight.
Several companies are already harnessing the power of Ethereum’s smart contract feature. Vancouver-based startup Etherparty helps businesses create more efficient workflows with blockchain-based supply chain management solutions. A real-estate service called Propy uses smart contracts to help owners and brokers do business all over the world.
In order to run a centralized internet platform like Google, you need an enormous amount of computing power. DApps, however, run on large distributed networks. These networks are much less expensive to use. And because DApps are collectively owned rather than owned and run by a single corporation, they are much more difficult to censor or control.
CryptoKitties-- a game featuring cryptographically unique digital kittens-- attracted media attention in 2017 when users started paying hundreds of thousands of dollars to snatch up the rarest kinds of collectable cats. Another notable DApp is Decentraland, which aims to become a fully decentralized, virtual reality version of Google.
Ether is generally used for two purposes. It is traded as a digital currency like other cryptocurrencies as well as being used inside Ethereum to run applications and even to monetize work.
Gitcoin is a decentralized platform that lets coders earn ETH for contributing to open source projects. Ethlance is similar, only it has a wider scope. Content writers, website designers and other types of internet freelancers can connect with project leaders and work for Ether.
Other Differences between Ethereum and Bitcoin
In addition to having different features and divergent monetary supply philosophies, there are a number of other points of contrast between Ethereum and Bitcoin. Both coins were built from different programming languages. In addition, they both use different mining algorithms to process and verify transactions.
While Bitcoin is written in a stack-based programming language, Ethereum is written in what’s known as Solidity. Solidity is a programming language for writing smart contracts and is “Turing complete.” This essentially means you can write programs that can solve any reasonable computational problem. This allows you to implement sophisticated logic in the Ethereum smart contract.
Bitcoin’s programming language is Turing incomplete. This is a hassle for developers because it means that determining if a program will halt or run forever due to a coding error requires extra steps.
Bitcoin’s block time is 10 minutes. That means it takes at the very minimum of 10 minutes for a transaction to confirm. Ethereum’s block time is around 17 seconds, which makes confirmations a lot quicker on the Ethereum network.
Bitcoin and Ethereum currently use the same mining algorithm to process transactions Proof-of-Work (PoW). However, Ethereum developers are currently in the process of switching to Proof-of-Stake (PoS). Here’s a quick breakdown of the differences between the two transaction processing methods.
The most significant disadvantage of PoW is its reliance on brute computing power.
In the Bitcoin network and in other PoW-based cryptocurrency networks, transaction validators called miners compete to verify transactions and write them to the blockchain. But in order to win the right to actually add the block to the chain, miners have to solve a very complex mathematical puzzle. Solving the puzzle first requires an enormous amount of computing power. The winner gains the right to harvest a BTC reward.
When Bitcoin first debuted years ago, ordinary computers could compete for the mining reward. Today, BTC mining operations are dominated by companies that run powerful server farms. These server farms use enormous amounts of electricity. Bitcoin server farms now consume more electricity than the entire nation of Iceland, although recent research says that 78% of this power is from renewables.
On the other hand, PoW networks do have one advantage they are very difficult to compromise. In theory, anyone who could gain control of 51% of Bitcoin’s network could initiate double spend attacks and prevent transactions from being processed. The huge amount of computing power required to do this makes this type of attack almost impossible to carry out.
PoS has a number of advantages over PoW. Chief among these is the fact that there is no energy-intensive mining involved in processing transactions. Instead of competing to solve very difficult math problems, the right to add a new block to the chain and collect a reward typically goes to the nodes with the largest cryptocurrency wallets. The larger stake a node holds the greater chance it has to win.
In PoS networks, nodes that process and authenticate transactions aren’t called miners. Instead, the act of adding new blocks to a PoS chain is typically referred to as forging or minting.
Even though PoS networks are more energy efficient, there are a few downsides. One is the obvious problem of inequality. People who can afford to purchase large stakes will win most of the forging rewards. Ethereum developers will have to find ways to counter the creeping centralization that may begin to occur once they complete the algorithm change.
Ethereum and Bitcoin are both decentralized cryptocurrencies. They aren’t supposed to be influenced by private businesses, governments or wealthy individuals. Still, certain decisions do have to be made. For example, someone has to decide which bugs to fix and how those fixes should be implemented. Upgrades and improvements need to be determined as well.
In a recent blog post, Satoshi Nakamoto Institute co-founder Pierre Rochard explained some of the nuances of Bitcoin’s governance system. According to Rochard, Bitcoin miners, nodes and investors are the biggest influencers but there is no formal decision-making system. Competing camps within these groups have different preferences. Some believe that maximizing the value of Bitcoin should be the main priority, but others say that preserving the trustless nature of the Bitcoin network should take precedence.
Anyone who wants to make a change has to be willing to endure a rigorous, lengthy process of explaining the proposal to all the major players. Some proposals are distributed through the bitcoin-dev mailing list, but others are submitted in the form of a BIP (Bitcoin Improvement Proposal) or a white paper.
Most of the major decisions regarding Ethereum are made through the open source code repository Github. Anyone with the knowledge and influence to do so may submit an EIP (Ethereum Improvement Plan). Once an EIP is submitted, a group of Ethereum developers known as the Fellowship of Ethereum Magicians look it over and decide if it's viable. From there, other stakeholders-- such as ETH nodes and miners-- provide their input.
As is the case with Bitcoin, the process of getting a proposal approved requires a great deal of informal networking on a variety of different channels.
The main differences between Ethereum and Bitcoin stem from the fact that their development teams have different goals. Because there are hard limits on the available supply of BTC, Bitcoin can be compared to gold and other scarce assets. In contrast, Ethereum’s developers are focused on expanding the capabilities of the Ethereum network.